Short-term capital gains are taxed as ordinary income at your regular tax rate

When you sell an investment you have owned for one year or less, the profit counts as short-term capital gain. The IRS taxes this profit at the same rate as your wages, salary, or other ordinary income. That rate depends on your tax bracket — it could be 10%, 12%, 22%, 24%, 32%, 35%, or 37% in 2024, depending on how much total income you earned that year.

This is different from long-term capital gains, which get preferential rates of 0%, 15%, or 20%. The difference matters: a $5,000 short-term gain on a stock you held for six months could cost you $1,200 in federal tax if you are in the 24% bracket, while the same gain held for over a year might cost only $750.

The holding period starts the day after you buy and ends the day you sell. If you buy on January 15 and sell on January 15 the next year, that is long-term. If you sell on January 14, it is short-term.

Key Takeaways

  • Short-term capital gains use your ordinary income tax rate, which ranges from 10% to 37% depending on your total income for the year.
  • You must hold an investment for more than one year to may have access to for the lower long-term capital gains rates of 0%, 15%, or 20%.
  • The holding period begins the day after purchase and ends on the day of sale.
  • You report short-term gains on Schedule D (Form 1040) and include them in your taxable income on your main return.
  • State income tax also applies to short-term gains in most states, adding 3% to 13% or more depending on where you live.

How your tax bracket determines the rate you pay

Your short-term capital gains do not get their own separate tax rate. Instead, they are added to your other income for the year, and the total determines which bracket you fall into. If you earned $60,000 in wages and have a $10,000 short-term gain, you are taxed as if you earned $70,000 total.

The 2024 federal tax brackets for single filers range from 10% on income up to $11,600, to 37% on income over $578,100. For married filing jointly, the brackets are roughly double. Your short-term gain pushes you into whichever bracket your combined income reaches.

This means the actual rate you pay on a short-term gain depends on your situation. Someone in the 12% bracket pays 12% on the gain. Someone in the 35% bracket pays 35%. There is no flat rate — it is whatever bracket you land in after adding the gain to your other income.

State and local taxes on short-term gains

Federal tax is only part of the bill. Most states tax short-term capital gains as ordinary income too, and the rates vary widely. California taxes capital gains at rates up to 13.3%. New York goes up to 10.9%. Texas, Florida, and Washington have no state income tax at all, so you pay only federal.

Some states treat capital gains differently than wages. A few — including North Carolina and Vermont — have experimented with separate capital gains tax rates, though these change frequently. Check your state's tax website or a tax software program to see what applies where you live.

If you live in a city with local income tax — Philadelphia, New York City, or Columbus, Ohio, for example — that adds another layer. Philadelphia's local tax is 3.8712% on all income, including capital gains. These local rates stack on top of state and federal.

How to report short-term capital gains on your tax return

You report all capital gains and losses on Schedule D, which is part of Form 1040. Short-term gains go in Part I of Schedule D. You list the date you bought, the date you sold, the cost basis (what you paid), the sale price, and the gain or loss.

After you complete Schedule D, the total short-term gain or loss transfers to line 7 of Form 1040. If you have a net short-term gain, it becomes part of your taxable income. If you have a net short-term loss, you can deduct up to $3,000 against other income in that year, and carry forward any remaining loss to future years.

Your brokerage or investment platform sends you a Form 1099-B showing all sales during the year. Use this to fill out Schedule D. If you sold through multiple brokers, you will receive multiple 1099-B forms and must list all transactions.

The difference between short-term and long-term rates

Long-term capital gains — from investments held over one year — receive preferential tax treatment. The federal rates are 0%, 15%, or 20%, depending on your income level. These rates are much lower than ordinary income brackets.

For 2024, single filers pay 0% on long-term gains if their income is under $47,025. They pay 15% if income is between $47,025 and $518,900. They pay 20% on gains above that. Married filing jointly thresholds are roughly double. This means a $10,000 long-term gain for someone in the 24% ordinary bracket might cost only $1,500 in federal tax instead of $2,400.

This is why timing matters. Waiting a few months to cross the one-year threshold can save thousands in tax on a large gain. However, if you believe the investment will drop in value, holding to get long-term treatment might not make sense.

What happens if you have both short-term and long-term gains

If you sold multiple investments in the same year, you may have both short-term and long-term gains. You report them separately on Schedule D, but they interact in a specific order.

First, you net all short-term gains and losses together. Then you net all long-term gains and losses together. If you have a net short-term loss and a net long-term gain, the loss reduces the gain. If you have both a net short-term gain and a net long-term gain, you pay the higher rate on the short-term portion and the preferential rate on the long-term portion.

Example: You have a $5,000 short-term gain and a $5,000 long-term gain. You report both on Schedule D. The $5,000 short-term gain is taxed at your ordinary rate (say, 24%), costing $1,200. The $5,000 long-term gain is taxed at 15%, costing $750. Total federal tax: $1,950.

Frequently Asked Questions

Do I pay short-term capital gains tax if I sell at a loss?

No. If you sell an investment for less than you paid, you have a capital loss, not a gain. You can deduct up to $3,000 of net capital losses against your other income in that year. Any loss beyond $3,000 carries forward to future years with no time limit.

What if I day trade and have dozens of short-term trades?

Each trade is reported separately on Schedule D, but they all net together. If you bought and sold the same stock multiple times, list each transaction. The IRS does not penalize frequent trading, but all gains are taxed as short-term at your ordinary rate. Some traders use the "wash sale" rule to offset gains with losses, but this rule prevents you from claiming a loss if you buy the same security within 30 days before or after the sale.

Can I avoid short-term capital gains tax by holding the investment longer?

Yes. If you wait until you have held the investment for more than one year, any gain becomes long-term and qualifies for the lower 0%, 15%, or 20% federal rates instead of your ordinary income rate. However, the investment could drop in value during that waiting period, so this strategy only makes sense if you believe the investment will hold its value or grow.

Do I owe short-term capital gains tax on investments in a 401(k) or IRA?

No. Investments inside a 401(k), traditional IRA, or Roth IRA are not subject to capital gains tax when you sell them inside the account. You only pay tax when you withdraw money from the account (and only on traditional accounts and 401(k)s, not Roth accounts). This is one major advantage of using retirement accounts.

What if I inherited an investment and sold it right away?

You receive a "step-up" in basis when you inherit. This means your cost basis becomes the investment's value on the date of death, not what the original owner paid. If you sell shortly after inheriting, you likely have little or no gain, even if the original owner bought it decades ago at a much lower price. This applies whether you hold it short-term or long-term.